Increasing pension contributions with inflation could boost someone’s wealth by up to £124,000, new analysis suggests.
With the average wage rising by 5.6 per cent this year, the average full-time UK worker on around £35,000 enjoyed a healthy pay rise of nearly £2,000, according to data from the Office for National Statistics (ONS).
Those with pay rises could be £124,000 better off in retirement if they increase their pension contributions in line with inflation this tax year.
As the new tax year gets underway, workers are encouraged to have a “spring clean” of their finances and review their savings and investments.
New data from interactive investor shows that increasing investment or pension contributions with inflation could boost wealth by up to £124,000 over 40 years, compared to not increasing their contributions over the same period.
A pension saver contributing £250 each month (£200 contribution plus £50 tax relief) could end up with around £124,000 more pension wealth by retirement due to upping their contributions by two percent each year - £496,000 compared with £372,000.
The average full-time UK worker on around £35,000 enjoyed a healthy pay rise of nearly £2,000, ONS figures show
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Likewise, an investor making regular monthly contributions of £200 outside a pension could end up with around almost £100,000 more after 40 years if they increase their contributions by two per cent - assuming annual pay rise is in line with the target inflation level - each year, compared to not increasing their contributions - £397,000 compared with £298,000.
Alice Guy, head of pensions and savings at interactive investor explained that Britons can give their future selves a massive pay rise by keeping an eye on their regular investments and inching them upwards over time.
She warned the cost of not increasing contributions can have a big impact on one’s future wealth, meaning they contribute less and less in real terms as time goes by.
The pensions expert added: “When it comes to your pension, increasing your contributions is especially valuable as any extra payments are supercharged by additional pension tax relief.
“This means it only costs £80 to increase your pension contributions by £100 each month, as you’ll receive a £20 tax boost.
“For higher-rate taxpayers it’s an even better deal and it only costs £60 to pay £100 into your pension, due to additional tax relief. Upping your pension contributions over time can give your wealth a huge boost and make it easier to achieve your retirement goals.”
Those with a workplace pension do not have to worry about increasing their contributions as it should increase automatically the more they earn as their contributions are based on a percentage of their salary, however self-employed workers or those who are saving extra pension contributions into another pension like a SIPP should consider taking action and increasing their contributions if they can afford it, the expert said.
Ms Guy explained the minimum contributions “often aren’t enough for a comfortable retirement”.
The Pensions and Lifetime Savings Association’s latest figures show that retirees need £43,100 per year for a 'comfortable' standard of living, and £31,300 for a 'moderate' lifestyle.
A 'comfortable' retirement includes £500 per year for home improvements, £175 per week to spend on food, £1,500 per year in clothing costs, an annual two-week holiday in Europe, and £50 per birthday or Christmas present. The headline income figures do not include tax, housing or care costs.
Even with auto-enrolment, savers may still not have enough for their comfortable retirement.
It is important to note that a comfortable retirement is different for each individual but with proper financial planning, each person can know their ball park figure to help their savings appetite become more intentional.
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Myron Jobson, senior personal finance analyst at interactive investor, explained that various life events means that not everyone who receives a pay rise will be able to afford to uprate their investment contributions. But he said those who can should turbocharge their investment portfolio in a meaningful way over the long term.
He said: “Uprating investment contributions by the same percentage as a pay rise allows investors to maintain their current standard of living while also boosting their portfolio.
“This approach also helps to avoid unnecessary lifestyle inflation, where expenses increase along with income, and instead ensures that you are consistently investing more for the future.
“Of course, it remains important to ensure you have enough savings to cover unexpected expenses and consider short- and long-term financial goals before increasing investment contributions.
“Our calculations show that over time, this disciplined approach can lead to significant wealth growth over time, with the wonder of compounding returns working their magic, and reinforce financial resilience.”
